product

promotion

place (location)

primary challenge = in most

industries, impossible to cost-driven
determine a product's unit cost
before determining its price -->
costs change with volume Marketing Mix -
(ECONOMICS OF SALES)
4Ps
primary challenge: price
war --> only temporary pricing
competitive advantage competitive pricing

ie: a price for a Ford Mustang BEST

was set first then the engineers
had to figure out how to build the
car under that cost definition value-based

costs

customers
pricing strategy depends on 3 factors
competition
side benefit to the biz: needn't
make explicit hourly rate --> a
number that often raises eyebrows

benefit to customers; offer a (1) all inclusive price

piece of mind to customers -
ease for budgeting one cannot price effectively
without understanding costs,
I doubt if TXC considered this factor incl. economics of scales
when determining a flat fee, how should cost
build in 25-50% more for the NEVER determine price
affect price?
extra time you'll inevitably need Cost
your decisions abt which
don't offer to do initial products to produce & in what
work (complimentary hr of specific pricing strategy quantities depend heavily on
consultation) for free --> RATHER, play a their cost of production
ppl take the freebie and critical role in
walk. you look desperate formulating pricing
strategy
ie: if you build websites, instead of expecting the incremental costs
customer to hire you off-the-bat to develop their (2) sell a low-priced product first
associated with changes in pricing and sales
site, say, "Let's take it one step at a time so you
can feel comfortable with my work. for now, why variable costs
dont you just hire me to develop a blueprint for you cost of doing biz (raw materials, direct labor)
site? If you're satisfied with that, we can go further"
3 types of costs costs of being in biz
(rent)
provide customers w a piece of mind semi-fixed cost: ie able to fill orders up to 500 additional units
(3) offering a guarantee each month w/o purchasing any new equipment
fixed costs
(4) charge more for rush jobs

(5) accept non-cash payments (products)

develop a reputation for as a low-cost provider

cheap = sloppy mentality

though offered rock-bottom price, they're more likely to nitpick attract difficult customers
your project to get a price concession or more work out of you for
free

listen to customer needs, professionally propose a

service/product, offer a price within reason
reasons not to compete on price
"be4 i can give you an accurate price, i need to know a little more
abt your needs, tell me abt our situation

listen to customer's situation

defer the the answer!! ie 1: Ponds can price its petroleum jelly 1,400% higher per ounce
ask a few questions it's rarely necessary to be the low-price leader customers new to a market usually when packaged and sold as Vaseline Lip Therapy bc the
when to present your price? less aware of discount brands than perceived substitute for the positioning, Chapstick, has a similar
"so it sounds like your biz needs X, Y, and Z. Am I reading you ppl w more exp --> they pay higher price
right? what to ask prices and buy from the visible
summarize their needs
suppliers
here's what it will cost you ie 2: Woolite, although expensive for a detergent, has successfully
positioned itself as an inexpensive substitute for dry cleaning
give the price

two separate charges to consume a single product two-part prices
ie: admission ticket to
theme park and ticket
charge for each ride
differ from order
discounts in that they
do not apply to the
total quantity
purchased, but only
to the purchase
beyond a specified
amount
ie taxi fare: $10 for
the first mile, $5/mile
thereafter
might be illegal if
giving hefty discount
to big purchases -->
give an unfair
competitive
advantage over
smaller grocery
chains --> illegal
PURPOSE: retain biz
of large customers
PURPOSE: encourage customers to place larger orders --> per-
unit cost of processing and shipping declines with the quantity
ordered
ie 2: (PEAK-LOAD PRICING): airlines face greater demand for
seats on Mondays, Thursdays, and Fridays than other days
ie 3: Loctile corp. positioned its powerful adhesive as a substitute
for nuts and bolts, enabling it to charge a high price by the
standards of its product category and still offering substantial
savings for customers
(1) perceived
ie 1: sales of top-end model
substitutes effect
disappointing --> mgt thought solution: add a new, even
it must be overpriced --> turn it more expensive model to its
the price wasn't too high, BUT line --> new, most expensive
THE CUSTOMERS SIMPLY product sold poorly, but the article about pricing
DIDN'T NEED "THE MOST previously top-end model sold for restaurants lol
EXPENSIVE MODEL" much better!!! hahaha (Mircella)
step discounts pricing tamales for Tamales Hombres!!!!
impact of substitutes
BY: purchase quantity to what extent can customer's price expectations be influenced by
the positioning of one brand relative to particular alternatives
what alternatives are customers typically aware of when making a
purchase
questions to ask
to what extent are customers aware of prices of those
substitutes?
product differentiation (Iphones)
volume discounts
does the product have any unique attributes that differentiate it
from competing products?
Segmented pricing (2) unique value effect
order discounts what attributes do customers believe are important when
choosing a supplier?
questions to ask how much do buyers value unique attributes?

ie 1: seasonal biz offers discounted prices during non-peak BY: time of purchase how can you increase the perceived importance of these different
months when biz slows down attributes?

ie 1: theaters give discounts to college students who are more possible reason: when
price sensitive bc of their incomes and their alternative course of buyer make product-
campus entertainment specific investments to
use them if those investments do not need to be repeated when buying
ie 2: coupons provided by the seller give price-sensitive shoppers BY: buyer identification from current supplier, but do when buying from a new supplier,
(3) switching cost effect that difference is a switching cost that limits price sensitivity
another way to identify themselves

ie 1: dentists, opticians sometimes have multiple offices in to what extent have buyers already made investments (monetary
different parts of a city, each with a different price schedule & psychological) in dealing with one supplier that they would need
reflecting differences in their client's price sensitivity. to incur again if they switched suppliers?
BY: location
questions to ask
pay more for more functionalities jpw ;pmg are buyers locked into those expenditures?
BY: product design
buyers are less sensitive to price of a known brand when they
ie: seasonal tickets have difficulty comparing alternatives

(1) indivisible bundles
TAMALES HOMBRES: if wanna sell in a pack of 6, do include
individual price at a high level --> incentivize customers to buy in
bulk but still give them the option
rather than attempting to find the best price in the market and risk
getting a poor value in the process, many buyers simply settle for
what they are confident will be a satisfactory purchase SEO/SEM consulting service: lack of substitutes, hard to
BY: product bundling
perceive the quality w/o actually trying it --> willing to pay
types of bundling more to avoid risking sloppy services at lower price
(2) divisible bundles
(4) difficult comparison effect how difficult is it for buyers to compare the offers of different
suppliers?

can the attributes of a product be determined by observation, or

at least more equal to or more than what you'd get as a full-time must the product be purchased by a consumer to learn what it
ee --> otherwise, being an ee may be a simpler way to pay bills what you need to earn offers?

determin salary-equivalent you need, in annual/monthly/weekly questions to ask what portion of the market has positive past exp w your products
terms
are the prices of different suppliers easily comparable, or are they
cost of doing biz / OH stated for different sizes and combinations that make
comparisons difficult?
mandatory benefits: social security, FUTA, SUTA, etc --> ~14% of
salary ie 1: study reported cases where a new synthetic car wax faced
customers are less sensitive strong customer resistance till its price was raised from $.69 to
RULE OF THUMB: take desired salary and add 30-40% to it to understand your costs to a product's price to an $1.69
cover taxes, benefits, retirement, insurance Virginia SBDC - Pricing Strategy & Tactics extent that higher price
signals better quality ie 2: sales of a creamy style cheesecake were poor till the
salary personal cost company raised the price to equal that of its heavy regular-style
cheesecake
retirement: ~10% of salary
(5) price equality effect ie 3: buyers could not judge the qualit of either product before
insurance (health and life): call an agent purchase. Therefore, customers played it safe by avoiding cheap
products that they believe were more likely to inferior
training: improve service and stay up with current trends service and
consulting is a prestige image an important attribute of the product?
time off: holidays, weekends, vacations, sick days
is the product enhanced in value when its price excludes some
marketing: posting ads, attending networking events, etc consumers
inventory of time / questions to ask
administration: invoicing, paying bills, dealing with suppliers, Total Billable Hours = is the product of unknown quality and are there few reliable cues
finding equipment, etc 365 - the following for ascertaining quality before purchase?
how significant are
calculate breakeven rate= (cost of doing biz/OH + personal cost) customer's expenditures for
/ (total billable hours) CUSTOMERS - the product in absolute
factors that affect dollar terms (for biz buyers)
add profit rate= breakeven rate * (1 + profit %) pricing and as a portion of income
questions to ask (for end consumers)?
"going rate": what do your fellow professionals charge> What pricing strategy for Ranglers Spraying house!!
are prospects paying? call them and ask. or have a friend call
ie 1: heating insulation costs $2 per foot when sold to consumers
"until they say outch" raise your rates periodically --> can (6) expenditure
in lots of 25 ft, but only $.50 per foot when sold to building
always negotiate down effect contractors by the truckloads of tens of thousands of ft

"a piece of the action": based your fee on a % of sales or FINAL RATE: add these factors to the "profit-rate" price (above) buyers are more price ie 2: higher-income customers can afford a wider variety of goods
savings you create (get the deal in writing) sensitive when the cannot always afford time to shop for them --> rather accept
expenditure is larger higher price as a substitute for time spent shopping
"paying for priority": like rush orders extra charge --> often worth
25-50% more --> dont be greedy though the more price sensitive
buyers are to the cost of the
end-benefit, the more
begin with customer and their definition of value (money
sensitive they will be to the
saved/profit generated from using your products)
price of products that ie 1: wife wont like it if husband uses a 2-for-1 coupon when going
contribute to that end-benefit out for a dinner for a special assocation
LET ANTICIPATED PRICING DETERMINE THE COSTS
INCURRED RATHER THE OTHER WAY AROUND (JAMES)!!!
ie 2: Mobil Oil's premium price is well-justified considering the
calculate total costs price of the car that the oil is intended to protect
variable costs
industry-specific pricing tactics
what end-benefits do customers seek from product
fixed costs
(7) end-benefit effect
calculate fixed OH per unit how price sensitive are buyers to the cost of end-benefit
must make a fairly significant assumption as to how many units
will be produced
what portion of the end-benefit does the price represent or
account for?
theoretical bc u need to guess the questions to ask
number of units to produce --> calculate breakeven cost
to what extent can the product be repositioned in the customer's
nevertheless, it can give u some idea value-based pricing minds as related to an end-benefit for which the buyer is less cost
abt costs you need to cover when
sensitive or which has a larger cost?
finalizing your price
manufacturing
effect of partial or ie 1: insurance covers a share of customer's cost of a dr's visit or
= total oh / total direct cost
complete a prescription drug
reimbursement on
breakeven cost = total direct cost + total direct cost * OH rate calculate OH rate price is called the ie 2: Kristen doesn't mind buying more expensive books from
as your product moves thru the shared-cost effect Barnes and Noble bc she will get reimbursed bc of her
distribution chain, there will be a scholarship
different price point for each player VIABLE only when profit from
have to establish a price for you (wholesaler, retailer, middlemen, etc) selling to customers who react ie 3: Boots pharmaceuticals recognized that low introductory
distributors, a wholesale rate for
little to price differences (8) shared cost effect prices of its anti-arthritic prescription drug Rufen would be
retailers, and a suggested retail capture high margins
exceeds that from selling to ineffective bc insurance reimbursements cover such a high
price for consumer at the expense of
larger market at lower price portion of its price
mkt channel high sales volumes (1) skim pricing
if not sure, need to research exactly what margins each of these
ie: patents & trademarks does the buyer pay the full cost of the product
steps in the chain are accustomed to achieving --> if any of your
margins are too low at any point of the chain, your product won't
lacking either a unique advantage or questions to ask if not, what portion of the cost does the buyer pay?
receive a lot of attention by the middlemen in between
patent protection, a skim pricing
2 types of cost biz must have some source of competitive perceptions what is
strategy will simply create a market for
associated with protection to ensure long-term profitability reasonable are also
a lower-priced competitor
product by precluding competitors from providing affected by prices for ie 2: since most medications in oral form cost only a few cents
cost of goods (acquiring and delivering the goods)
lower-priced alternatives similar products or in each, ppl simply expect other oral medications should be similarly
setting a price far similar purchase situations priced
fixed operating expense enough below
markup: applied on generate sales economic value to ie 3: patients consider pill costing $1 or more per doe outrageous
the total of 2 costs ie 1: Uber's subsidizing its rides volume even at the attract and hold a even when reduced patient suffering and reduced cost of other
above (COG and expense of high large base of medical services justify the price in value terms
either: use a standard markup for ALL goods fixed oper. exp) ie 2: Red Roof Inns target margins customers
travelers who don't need concept of fairness
hotel amenities such as pol has little to do with
or: different markup for different goods
but who just want a good profitability
customers are more ie 1: oil companies are accused of gouging customers, though
calculate your gross margin retail night's sleep in a clean room sensitive to price their profits are below the avg U.S industry
(1) low prices when it is outside the perceptions of fairness products that are
calculate your breakeven point undermine the range that they seem to be related to necessary to maintain
prestige value of your perceive is fair whether the product is one's current living
unload aging merchandise and free up cash Lacoste allowed its alligator Izod shirts to be discounted by brand name (2) penetration pricing
lowered-priced mass merchants, high-image retailers refused to necessary to maintain a standards are quickly
carry the product and customers migrated to more exclusive (9) fairness effect previously enjoyed perceived as "necessities"
merchants tend to get attached to standard of living, or is although mankind has
what they buy --> "just 1 more week. brands. charging a high-price for a
when penetration pricing fails? Generic pricing purchased to get st more probably survived w/o
it'' sell!" --> this practice is like discount less, but discount sooner out of life them for most of history "necessity" is generally perceived
leaving money on the table reducing (2) attract few customers to products for which price is a trivial strategies as unfair --> same ppl however
overall profitability expenditure (chewing gum) or to products for which value is may buy a new car, jewelry, or a
difficult to compare across suppliers (medical care) fairness and necessities vacation w/o objecting to equally
high prices or price increases
price sensitivity of customers enables warehouse clubs to vary the
brands they offer depending upon who gives them the best deal -- how does the product's current price compare with prices ppl
> increase leverage with suppliers have paid in the past for products in this category?

enable them to maintain high turnover, high sales per square foot, how penetration what do buyers expect to pay for similar products in similar
hgih sales per ee --> undercut full service retailers while still strategy works. ie of purchase contexts?
earning equal or better profits per share costco questions to ask
ie: GM priced its Chevrolet Camaro at a level that would make it is the product seen as necessary to maintain a previously enjoyed
Even when car's styling proved so popular that demand exceeded affordable to a much broader market than the segment willing to standard of living
why? GM already had one skim-priced product in its product line, production capacity pay a premium for its sporty look customer's ability to hold
the Corvette --> another would be viewed as redundant and could inventory for later use
take sales away from the higher-priced product substantially increases their
reaction to temporary price
decision not to use price to gain market share, while not allowing changes from what they
price alone to restrict it expect in the long-run. ie 1: rebate programs prompted a few new car sales that would
not otherwise have been made. Instead, many families simply
(3) neutral pricing bought cars during the initial rebate period that they would have
minimize the role of price as a mkt tool in favor of other tools that (10) inventory effect otherwise bought later.
an entrepreneur believes are more powerful or cost-effective for a
product's market
do buyers hold inventories of the products?
biz normally adopts a neutral strategy by default bc the conditions
questions to ask do they expect the current price to be temporary?
are not sufficient to support either a skim or penetration strategy

that market share is the key

to profitability --> WRONG

BY: adding to the value

of what is offered w/o
adding as much to cost
rather than attracting
customers by taking less in
profit, these strategies BY: reducing costs
SUSTAINABLE attract customers by without equally reducing
market-share myth the value offered
COMPETITIVE positive-sum creating more value or more
ADVANTAGE competition operating efficiency
ie 1: supplier of commodity small parts used in electrical manuf
illustrates the value-added strategy (1) prices are 10-15% higher
real source of than competitors' prices. (2) BUT target customers no one else
profitability wants. Competitors: require $500 min order and takes weeks to
ship. The biz: accept small orders and ship within 24 hrs

ie 2: Costco targets customers who

COMPETITIONS
price discounting in
competitive markets
can be served at lower cost --> low
markups, no store decor, limited
selection, almost no service
sure bet to enhance immediate sales and profits

BUT fail to recognize longer-term consequences

price discounting pricing against competition is

more challenging and hazardous
than pricing an unique product

ie 1: Walmart, Southwest airlines

ie 2: Microsoft initially priced Windows very low to increase sales

under pricing of other software that runs on it